Home Residential Zillow’s Economist Sees Housing Demand Slowing, But Pricing Growth Will Remain

Zillow’s Economist Sees Housing Demand Slowing, But Pricing Growth Will Remain

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By Brittan Jenkins

Speaking to a packed room at NAIOP’s monthly breakfast meeting Zillow’s Crystal Ball on Seattle Real Estate, held at the Four Seasons Hotel on Wednesday, Zillow’s senior economist, Dr. Skylar Olsen gave an enthusiastic and often playful presentation that answered some lingering questions about the Puget Sound’s housing market, speaking primarily on the renting and buying market of single family homes.

Much of the presentation focused on a compare and contrast between Seattle and the rest of the United States, with emphasis on the housing market pre- and post-recession. While the market, in many respects, hasn’t fully recovered from the Great Recession, the market in Seattle picked back up quickly.

Home values in the U.S. are now nearing pre-recession highs with annual appreciation rates accelerating in the second half of 2016, according to Dr. Olsen. “Now we’re about 1.4 percent from peak levels, and home values came back very quickly,” she said. “We’re appreciating faster than we did out of the recession but also comparable to what we saw as we approached the first bubble back in the mid 2000s.”

We will start to see a slowdown, possibly as affordability becomes more and more of a concern and demand is falling back

When looking at appreciation rates across the U.S., the Pacific Northwest is leading the way. “Pointing up these double digit appreciation areas, we’ve got the Pacific Northwest moving very, very quickly,” said Dr. Olsen. While Seattle is moving quickly, Portland is moving faster than Seattle, which is appreciating around 14 percent year over year compared to Seattle, which is growing at 12 percent year over year.

But with home values, Dr. Olsen said we’re already beyond pre-recession peak levels, but we’re starting to slow down. “In Seattle, we did have a bigger boom, and we did have a bigger bust,” she said. “We will start to see a slowdown, possibly as affordability becomes more and more of a concern and demand is falling back.”

Using San Francisco as an example, Dr. Olsen said the Bay Area was one of those markets where she would’ve talked about it as a sensational example of extreme home value growth a couple years ago but things have slowed down very, very quickly, with the area now down 5 percent year over year. The slowing, in part, can be explained by San Francisco’s affordability crisis, according to Dr. Olsen adding, “San Francisco’s a nice cautionary tale of how we don’t want to develop and we don’t want to grow.”

In the Puget Sound region, home values are at their highest in Bellevue at an average of $751,300. Redmond trailed at $705,000 and Seattle averaged $609,100. Further away from the metro area, Renton, Everett and Tacoma had lower home values at $402,300, $303,500 and $241,400, respectively. But overall, Dr. Olsen said home value growth is expected to slow through Q4 2017.

In Seattle, part of the slowdown is attributed to the renters’ market and yes, millennials. “A lot of the new people that come to the area rent first, potentially because they’re career minded, tech individuals,” Dr. Olsen said. “ They haven’t thought about those major life events that maybe precipitate home ownership like getting married and having a baby.”

Bringing millennials into the mix, Dr. Olsen said their habits can be explained by those two life decisions. “If we want to talk about millennial patterns, we can explain most of their delay for home ownership by those two demographic choices as opposed to some sort of preference for urban living and perma-renters,” Dr. Olsen said. “Millennials are not perma-renters, they’re just delayed… they’re in your basements,” she joked.

And while Seattle isn’t necessarily winning in the home value game, renting single family homes is increasingly popular. Again, Dr. Olsen pointed to another example in San Francisco as a market that we should’ve expected to see huge growth but didn’t quite pan out that way. “San Francisco would have been a sensational example of rent growth two years ago or a year ago even, and now they’re at one percent year over year, so extreme slowdown [is occurring] in the Bay Area.”

Nationwide, annual rent growth is strongest in the Pacific Northwest, with Seattle at 8.4 percent and Portland at 6.8 percent. But despite delivering record amounts of multifamily properties over the last few years and the expectation that there will be another year of growth in this area, Dr. Olsen said rent growth remains very, very strong.

“In 2015, there was a little more pressure on single family housing and a lot of that had to do with the fact that a lot of inventory, when foreclosed homes were harvested, were transferred over and became rental properties,” Dr. Olsen said. “It’s actually one of the reasons why for-sale inventory is still very low, because it disappeared in a lot of ways. It went towards rental properties, a lot of them were flipped,” she added.

In the Seattle market specifically, rent affordability isn’t great, and more people are spending more money on rent. Between 1985 and 1999, the share of income spent on rent was 24 percent, now, it shot up to 32 percent, a thirty-three percent increase. Not only have Seattleites been paying more for their rent, the phenomenon is seen throughout the United States as well. The share of income spent on rent is higher than the historic average in the nation’s 20 largest metros, Seattle included.

As a result of people spending more money as rents rise, more renters report saving nothing. Dr. Olsen explained that when people start spending 30 percent or more on housing, they’re unable to save for their future. For renters spending 45.4 percent or more of their income on housing, nearly 70 percent of people report saving absolutely nothing. “No rainy day, no retirement, no savings, nothing,” Dr. Olsen said.

Mortgage rates are higher, too, but not as much for some as others. Mortgage affordability in Seattle is at 25 percent, the same as it was between 1985 and 1999. But weak income and rapid appreciation, even with very low mortgage interest rates, means homes are becoming more unaffordable and more quickly for the bottom third of home buyers, Dr. Olsen said.

According to Dr. Olsen, lower-income workers with jobs in major downtown cores have moved farther away from city centers, ultimately causing workers to sacrifice distance for affordability. First time home buyers are also scraping together down payments to afford a home. Prior to the recession, only 8.2 percent of first time home buyers received a loan or gift from family and friends. Post-recession, over a quarter of first time buyers needed that resource.

Part of the problem also has to do with the lack of inventory. “Inventory has not returned,” Olsen said. And what is on the market is selling very quickly. “One house I saw at the beginning of the month, I’m not going to see at the end of the month,” Dr. Olsen said.

With fewer homes to buy, potential homeowners are having to submit about two bids on average to win the property nationally but in Seattle, the bids ramp up to more like four or five before winning the house. “Overall, homes are selling more quickly,” Dr. Olsen said. In Seattle, these homes are really only on the market for 20 days, she said.

Interestingly, the age of homes sold has nearly doubled since the housing collapse. Before, the average age of a home was 15 years old, today they’re averaging at 28 years old. What happens when buying older homes, owners must then flip them. Joking, yet making valid points, Dr. Olsen reminisced saying, “Remember when you used to put on a new coat of paint before you sold your home or tried to make it a little more appealing to buy… yeah you don’t have to do that anymore,” she said. “Someone will just buy it.”